8.1 State Budgeting Processes and Fiscal Federalism

State budgeting is a complex process involving multiple actors and stages. From budget preparation to execution, it requires balancing priorities, resources, and competing interests. The process is influenced by fiscal federalism, with federal grants playing a crucial role in state finances.

Governors, legislators, agencies, and interest groups all shape state budgets. Federal policies impact state budgeting through matching requirements, maintenance of effort provisions, and unfunded mandates. Understanding these dynamics is key to grasping state fiscal policy and intergovernmental relations.

State Budgeting Process

Components of state budgeting process

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• Budget preparation
  • Executive branch agencies submit budget requests detailing their funding needs and priorities
  • Governor's office reviews and compiles requests into a comprehensive proposed budget document
• Budget adoption
  • Legislature receives the proposed budget from the governor and begins the review process
  • Legislative committees hold hearings to gather input from agencies, experts, and the public
  • Legislature makes amendments to the budget based on their priorities and available resources
  • Legislature passes the final budget bill, which may require reconciliation with the governor's proposal
• Budget execution
  • State agencies implement the budget and spend funds according to the allocations in the final budget
  • Governor's office and state comptroller monitor spending to ensure compliance with the budget
• Budget oversight and auditing
  • Legislative committees and state auditor conduct regular reviews of agency spending and performance
  • Adjustments to the budget made as necessary through supplemental appropriations or budget cuts to address changing needs or revenue shortfalls

Role of fiscal federalism

• Vertical fiscal imbalance
  • States depend on federal grants to fund a significant portion of their budgets due to the federal government's greater ability to raise revenue through taxes
  • Federal grants help states provide essential services and programs (Medicaid, education)
• Horizontal fiscal imbalance
  • Economic conditions and tax bases vary among states, leading to differences in their fiscal capacity
  • States with lower fiscal capacity may require more federal assistance to meet their budgetary needs
• Intergovernmental transfers
  • Federal grants to states can be categorical, restricted to specific programs (highway funding), or block grants, providing more flexibility in spending
  • Grants help states fund programs and services that align with national priorities
• Fiscal competition among states
  • States compete for businesses and residents by offering tax incentives and high-quality public services
  • Competition can lead to a "race to the bottom" as states lower taxes and cut services to attract economic activity

Actors in state budgeting

• Governor
  • Proposes the initial budget based on the priorities and needs of the executive branch agencies
  • Has the power to veto specific budget items or the entire budget bill passed by the legislature
• State legislature
  • Reviews, amends, and passes the final budget bill, reconciling competing priorities and available resources
  • Holds hearings and negotiations to gather input and build consensus on the budget
• State agencies
  • Submit budget requests outlining their funding needs and program objectives for the upcoming fiscal year
  • Implement the budget and provide services to citizens once the budget is adopted
• Interest groups and lobbyists
  • Advocate for specific budget priorities and funding levels that align with their interests (teachers' unions, business associations)
  • Provide information and analysis to policymakers to influence budget decisions

Federal impact on state budgets

• Matching requirements
  • Some federal grants require states to provide a percentage of matching funds, which can strain state budgets and limit flexibility (Medicaid)
  • Matching requirements ensure that states have a stake in the programs they administer
• Maintenance of effort (MOE) provisions
  • Federal grants may require states to maintain a certain level of state funding for a program to receive federal funds
  • MOE provisions prevent states from substituting federal funds for state funds, ensuring continued state investment
• Unfunded mandates
  • Federal regulations that require states to provide services without adequate federal funding (Americans with Disabilities Act)
  • Unfunded mandates create budgetary pressures and limit state policy choices as they must allocate resources to comply
• Fiscal stimulus during economic downturns
  • Federal government may provide additional grants to states to stimulate the economy during recessions (American Recovery and Reinvestment Act)
  • Stimulus funds help stabilize state budgets and maintain essential services during economic downturns